Trade Liberalization for Developing Countries - Essay Example

? al Affiliation) TRADE LIBERALIZATION HAS BEEN GOOD FOR DEVELOPING COUNTRIES Trade liberalization is the reduction of the limitations on trade that nations around the world have put in place over several years. Protectionism, a term that is usually closely associated with trade, is a way of trying to make sure that local industries are buffered from competition from foreign manufacturers and can be implemented in several ways. These include tariffs, which increase the price of imports; quotas, which are physical limits on the amount of goods that can be imported; and other non-tariff restrictions like legislation and regulations that make it hard for foreign competitors to export goods into another country. The theory of comparative advantage insinuates that reducing trade limits (trade liberalization) and opening up global markets would lead to benefits from trade for all parties concerned. However, the theory is one thing, getting nations to agree to break down complex trade obstacles they have put up over the years is another thing altogether. Taking this complexity into account, how is it possible to know that countries that claim to have relaxed their trade restrictions actually have? Even if it is possible to confirm that this has happened, is there any evidence to ascertain that trade liberalization actually brings benefits to the developing world, where problems arising from the difficulty of penetrating the markets of the developed world are very grave? This paper aims to answer this question and more. Key words Trade liberalization, protectionism, trade barriers, tariffs, quotas, comparative advantage Most studies (extensive and comprehensive studies going back as far as the 70s and 80s, and more recent (though less reliable) ones conducted using cross-country regression analysis) strongly indicate that countries that have more liberal trade laws grow faster and have more open economies compared to those that have more protectionist policies (Buffie 2001, pg. 15). Since 1980, the PCIs of third world countries that have a combined population of over 3 billion people have doubled; this is according to figures released by the OECD and the World Bank. In addition to this, they have managed to slash, by more than 30%, their mean import tariffs, as well as almost tripling their ratios of trade-to-GDP. This means that only third world countries that are less developed, have combined populations of less than 2 billion, whose trade-to-GDP ratios and PCIs are stagnant, and who have insignificant decline in mean import tariffs, are left. Unlike the rest, the new globalizers have also witnessed dramatic improvements in welfare indicators and significant reductions in poverty. A lot has been made of the World’s Bank’s decision to revise its approximations of future effects of trade liberalization. They are not unimportant. However, trade liberalization only is not a panacea (Okamoto 2004, pg. 46). In order to fully realize productivity benefits, external liberalization should be integrated into comprehensive market-based reforms and be supported by institutional reforms that buttress markets – just like David Hume and Adam Smith indicated more than 2 centuries ago. The main point however remains that richer developing countries are those that have carried out massive liberalization of foreign direct investment (FDI) and external trade as a part of a broader move towards market economies (Vietnam and China are the perfect examples). So much for the very fallacious view that high protection in Vietnam and China has not stifled fast growth and has in fact triggered it. Should only developed countries liberalize trade during the Doha round? Northern trade limits suppress exports from labor-intensive developing countries, and are therefore very iniquitous. However, what groups like Oxfam do not say is that the protectionist policies of developing countries hurt them even more (Rogowsky & Linkins 2001, pg. 37). Such liberalization would benefit unskilled rural labor (the poorest among the poor) the most because it would suppress the anti-agricultural dependence in domestic economies. Oxfam’s biased trade liberalization is therefore a policy that brings elf-harm for developing countries that are members of the WTO. Despite its historical record, the infant-industry argument has returned and is now in the good books of developed countries’ economists and lobbyists. There have been disputes over infant-industry’s success in Germany and America in the 19th century. In addition to this, it is yet to be proven that high social returns and even higher increases in productivity were a result of the safeguard of infants (Ingco 2001, pg. 49). The unique success experienced in South-East Asia has been brought about by very lower tariffs and a positive approach to investment. South-East Asia’s obvious failures have been seen in industries that are closely guarded (e.g. the car industries in Malaysia and Indonesia). In similar fashion to South-East Asia, China has experienced fast growth driven by FDI-based exports, not protection of the infant-industry. Infant-industry protection has also been a complete failure similar to industrial planning that is popular in ex-command economies. The truth is that majority of developing-country markets are not big enough to buttress infant-industry growth and their states are too corrupt, incompetent and weak to manage complex instruments as efficiently as expected. With regard to WTO rules, it is logical for governments of developing countries to willingly sign agreements with other WTO members that solidify sensible policies (e.g. to limit performance requirements and subsidies), and administer external discipline against harmful and clumsy government intervention. That goes against the view that WTO commitments ought to be renegotiated so as to allow developing countries space for policy. Post-Washington Consensus views on trade like these, in addition to a new-found affinity for foreign for aid, have a similar, age-old suspicion of markets and belief in collectivist remedies (Buffie 2001, pg. 25). Collectivist reasoning is not new, but it is emerging again. A merger of old school protectionist interests and new school ideological forces is threatening to stunt the advancement of globalization and, in general, the advancement of the market economy. That would deny the world’s most underprivileged people the life-chances that free markets and economic freedom offer. These are what are at stake and that is why new-old perspectives on trade and aid should be combated with full force. Liberalization Supports Industries that are approaching the Stage of Maturity: A Look at Brazil In spite of the fact that Brazil generally performed poorly in the expansion of exports of industrial products, fast expansion of exports of machinery (especially non-electric) and vehicles, as well as other products like aircraft are of interest and an exception. These industries were approaching the stage of maturity and trade liberalization supported them and helped them achieve more efficiency. The remarkable performance of the aerospace industry in Brazil is an example of the success of selectivity and targeting; it is also proof that liberalization is effective in helping an industry become competitive when it is approaching the maturity stage because it harms inefficient industries or infant industries depending on prolonged protection. Aerospace is a skill intensive and high technology industry (Okamoto 2004, pg. 33). Although it faced a competitive crisis caused by the surprise of liberalization and privatization, it soon recovered to become Brazil’s most vital exporter of industrial goods. Between 1995 and 2000, there was 1430% increase ($183 million in 1995, $1.8 billion by 1999, and $2.8 billion in 2000) in the value of aircraft exported by Brazil exported aircraft. Embraer grew to become the worldwide leader in the production and export of commuter jets by 1998. The lesson here is that if a developing country can achieve success in such a competitive sector, it can achieve success in any industry provided that industry has reaped the benefits of trade liberalization and industrial regulations and policies. The aerospace industry in Brazil was established in 1945, and for 50 years was supported by the government in terms of financial benefits, budgetary allocation, procurement, and tax incentives. Both the company’s strategy and government policy were cumulative, targeted, coherent and continuous (Cattaneo 2010, pg. 67). In particular, the company focused on the technique of system integration and created local designs for a class of aircrafts to become independent and generate a differentiated product that was tailored for regional flights. In order to acquire the right technology, it concentrated on technical and organizational training, both know-how and know-why, through learning by adapting, by hiring, by training, by using, and by interacting. The Effect of trade Liberalization on Developing Countries’ Industries Country studies for Venezuela, Thailand, and Morocco have all shown a significant effect of trade liberalization on the sensitivity of imports to the growth of domestic income and on import growth, but the most comprehensive study is that which was done by Thirlwall and Santos Paulino (2004), who took 22 countries and tested 3 hypotheses: (a) trade liberalization, measured by a shift model variable (liby), greatly increases growth of imports; (b) lowering of tariffs (dm) raises import growth, and (c) a more liberal trade system increases the price and income elasticities of demand for imports (measured by interacting the growth of real exchange variables and income with the liberalization model, librer and liby respectively) (Bonilla, Frandsen, & Robinson 2006, pg. 34). The results can be summarized as follows: Trade liberalization, regulating for all other factors, has increased import growth by between 6 and 7 percentage points, which symbolizes a virtual doubling of the import growth prior to liberalization. The independent impact of tariff cuts has been to increase import growth by between 0.3 and 0.5 percentage points for one percentage point drop in tariff rates. Liberalization has increased import elasticity to both exchange rates and domestic income changes by between 0.3 and 0.5 percentage points. A study of a sample of ten nations with varying industrial bases (MVA/GDP ratio) in ‘89/91 (Mexico, Colombia, Costa Rica, Venezuela, Bolivia, Brazil, Chile, Haiti, Uruguay, and Argentina) showed that there has been major diversification away from those with high export growth, but it was mainly as a result of the fall in the price of primary goods. The same study also showed that almost all countries, especially those with a lower initial industrial base, e.g. Haiti and Bolivia, focused on exports of resource-based sectors like paper and wood products and/or non-metallic mineral commodities (Cattaneo 2010, pg. 56). With the exception of 4 countries (Colombia, Haiti, Mexico, and Bolivia) their biggest exports have suffered. The North American Free trade Agreement (NAFTA) helped Mexico gain increased access to the American market. Several countries (e.g. Mexico and Costa Rica) have however undergone fast growth of assembly activities. In Chile, for example, three decades of economic overhauls and liberalization of trade have led to primary products constituting over 82% of its natural resource-based industries – primarily chemicals and wood products. In fact, in case of copper, which forms the bulk of the country’s exports, the percentage of refined product fell in favor of primitive concentrates of copper. Growth of the car industry is evident in large countries (Venezuela, Brazil, Argentina, and Mexico) and Uruguay as a result of 3 main factors: the attraction of a large local market to TNCs, arrangements via MERCOSUR (Mercado Comun del Sur/Southern Common Market), and the extremely relative high tariff protection rate (Bonilla, Frandsen, & Robinson 2006, pg. 41). However, in most cases, especially Argentina and Mexico, assembly operations were the dominant activity in the industry. It is only Brazil that has a vital production capacity in this particular industry. Conclusion Trade liberalization has had mixed results in developing countries. This is because trade barriers cannot be completely done away with. Developing countries want to have greater independence and freedom in the way they carry out their trade activities. They also want to achieve industrialization quickly and in an efficient and sustainable manner. On the other hand, developed countries want to maintain their quotas by continuing to export manufactured products to the developing world. This has prevented the positive effects of trade liberalization from being fully realized (Michaely 2009, pg. 56). The few countries (e.g. Brazil and those in South-East Asia) have carried out intense lobbying and negotiations in order to gain advantages in export and industrialization. Another bottleneck has been a lack of investment by developing countries in industrial growth and expansion, although this is still a challenge given that only few gains have been made in terms of dismantling trade barriers. Trade liberalization has triggered an overhaul and improvement of the industrial sector in conformity with static comparative advantage. Only those industries that are on the cusp of maturity have not experienced this revolution. Trade liberalization is crucial when an industry has matured to a certain level, provided it is conducted in a keen and systematic manner. The recommendations put forward in the Washington Consensus are however likely to cause the collapse of current industries, particularly those that are just starting out without really inspiring the development of new ones. Some scholars have argued that there is disconnect between the creation of new, highly-efficient industries and trade liberalization (Sharer and Sorsa 1998, pg. 35). It is not clear what the degree of that disconnect is, but it is evident that any emerging industries will be in conformity with static, rather than dynamic comparative advantage. In the specific case of third world countries, it would indicate that they would be cornered in simple processing and the production of primary goods. They would have very little hopes, and room, for upgrade. In summary, therefore, trade liberalization is, and has been good, to an extent, for developing countries, but this is because its real benefits have been hampered by greed, mistrust, and a resistance to change on the part of developed countries. References Bonilla, E., Frandsen, S. E., & Robinson, S. 2006, WTO negotiations and agricultural trade liberalization the effect of developed countries' policies on developing countries, UK: CABI Publications, Wallingford. Buffie, E. F. 2001, Trade policy in developing countries, Cambridge University Press Cambridge. Cattaneo, O. 2010, International trade in services new trends and opportunities for developing countries, World Bank, Washington, D.C. Ingco, M. D. 2001, Agricultural trade liberalization in a new trade round: perspectives of developing countries and transition economies, World Bank, Washington, D.C. Michaely, M. 2009, Trade liberalization and trade preferences (Rev. ed.), World Scientific Hackensack, N.J. Okamoto, J. 2004, Trade liberalization and APEC, Routledge, London. Rogowsky, R. A., & Linkins, L. A. 2001, Trade liberalization fears and facts, Praeger, Westport, Conn. Sharer, R. L., & Sorsa, P. 1998, Trade liberalization in IMF-supported programs, International Monetary Fund, Washington, DC. Read More